Incentives for private developers to participate in Make in India projects

As the Narendra Modi government is ready to present the last complete Union Budget on February 1, a global real estate services firm expects that industry status to Real Estate (RE), incentives to rental housing, tax breaks for first time buyers would be included in the upcoming Budget.

The real estate services firm, JLL India, highlighted a few key milestones, including e-payment systems, affordable housing, introduction of RERA and GST, and FDI in real estate and construction sector, that helped in redefining the real estate sector in 2016 – 2017.

However, JLL India presents a few critical demands that the sector expects from the Union Budget.

Housing for all 2022

The government’s objective to creat ‘Housing for All 2022’ is still a far cry from realisation. This therefore will be a very high priority for government. While many steps have already been taken, the Budget 2018–19 should consider the below to meet and exceed its timelines.

Industry status to real estate

This longstanding demand from the sector which was pending transparency can finally be granted that status. So far the government has selectively bestowed the status on only affordable housing bringing it into the infrastructure fold. This move will open up strong possibilities of faster development and greater private participation on the back of financial options, tax exemptions on revenues and profits as well as access to preferential lending for key sector developments.

SME status to smaller developers

Affordable housing depends a lot on the participation of smaller private developers in lower tiers. Many of these developers are adept in working capital management, yet institutions are reluctant in lending to categories of developers especially in the lower tier markets. Many development companies in the lower tiers suffer due to lower exposure and higher perceived risks which limits the development. An amalgamate disclosure information of RERA with credibility rating of smaller developers to ensure they receive formal funding. While many private rating agencies are already doing the same, having a government mechanism for this rating would be laudable

Incentivize rental housing

Government should turn focus on rental housing schemes as it is also an important factor for social welfare. Much as it incentivised the affordable housing include rental projects held institutionally for formats such as student housing, senior living (long lease) and executive rental housing in growth centres.

For creating infrastructural growth, JLL India suggests that the country needs more financial musles which can be achieved through following steps.

Systematic introduction of Municipal Bonds

For development of local infrastructure, there are a limited options to borrow from the market however, local bodies need big money to finance their core development functions. SEBI has issued a detailed guideline in 2015 for urban local bodies to mobilise money through the issue of municipal bonds. The government should consider these recommendations and move towards municipal bonds with a tax exemption to investors. These will significantly reduce the burden on the centre and state governments in creating allocation matrix.

Incentives for private developers to participate in Make in India projects

‘Make in India’ initiative also needs to boost associated real estate infrastructure. This could be done by providing tax incentives for private developers and funds investing in developing Industrial set ups. These can include exemption from Stamp Duty & registration charges, exemptions/rebates on taxes and duties for materials and machinery needed to develop and operate such parks.

Rationalise taxation on REITs

The government has streamlined the structure of REITs to a large extent. While taxation issues such as dividend distribution tax, long-term capital gains tax on transfer of units have been resolved, REITS still need to pay Stamp Duty charges at the state level.

The government should consider convincing the states to exempt REITs from stamp duty for, at least for the initial few years, to increase the competitiveness of REITS in India.

According to the services firm, increasing tax incentives for first time home buyers will create larger number of inividual investors in real estate.

"Current provision is for additional tax deduction of up to Rs 50,000 per financial year under Section 80EE of the Income Tax Act. The bracket should be increased up to 1 Lakhs to incentivize first-time home buyers. This deduction is over and above the Rs 2 lakhs limit under Section 24 of the Income Tax Act," said Ramesh Nair, CEO and Country Head of JLL India.